1. Use the quantity equation to answer each of the following questions. [a] Assu

Question

1.Use the quantity equation to answer each of the following questions.

[a]   Assuming constant velocity, real GDP growth of 2 percent, and money supply expansion of 6 percent, what is the inflation rate?

[b] Assuming a 4 percent decrease in velocity, real GDP growth of 5 percent , and money expansion of 6 percent, what is the inflation rate?

2.

In April 2009, the African nation of Zimbabwe suspended the use of its own currency, the Zimbabwean dollar. According to an article from the Voice of America, "Hyperinflation in 2007 and 2008 made Zimbabwe's currency virtually worthless despite the introduction of bigger and bigger notes, including a 10 trillion dollar bill." Zimbabwe's Economic Planning Minister, Elton Mangoma, was quoted as saying the Zimbabwean dollar "will be out for at least a year," and in January 2009, the government of Zimbabwe made the US dollar the country's official currency.

      Hint: See pp. 254-257 in Chapter 11 of the course text book.

      [a]   Based on the analysis of Chapter 11, what was the probable cause of Zimbabwe's hyperinflation?

      [b] Why would making the US dollar the official currency enable Zimbabwe to end the hyperinflation?

Explanation / Answer

1a) If velocity of money is constant then inflation rate = Money growth - real GDP growth = 6% - 2% = 4%

b) If velocity is not constant then

growth rate of the money supply + growth rate of the velocity of money - growth rate of output = inflation rate

Inflation rate = 6% + (-4)% - 5% = -3%

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